bridging the gap between accounting and ... - lean frontiers
TRANSCRIPT
10/24/2017
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Bridging The Gap Between Accounting and
Operations
Jerry Solomon
Retired - Vice President of Operations – MarquipWardUnited, Hunt
Valley, A Division of Barry-Wehmiller, Inc.
• $2.4 billion annual revenues
• One of the largest capital
goods producers in the
Western Hemisphere
• More than 11,000 team
members
• Over 65 locations worldwide
• 19% compound annual revenue
growth for 21 years
• Well-balanced and financially
solid company
• Privately held by 400+
shareholders with an outside
Board of Directors
Barry-Wehmiller Cos.
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Barry-Wehmiller Group, Inc.
1. Using BWGI EVA Valuation Methodology
$5.89
$4.94
$7.03
$8.36
$10.73
$10.68
$12.03
$16.70 $18.38
$23.38
$27.67
$31.00
$35.91
$40.10
$47.50
$56.00
$60.06
$69.63
$74.14
$-
$10.00
$20.00
$30.00
$40.00
$50.00
$60.00
$70.00
$80.00
$/SHARE Share Price Trend 1
MWU Hunt Valley, Then & Now
Orders
Revenues
Operating income
Investment in R&D
Team members
Inventory Turns
Working capital investment
Functional/silo organization
Focus on Lean tools
Standard cost system
Up 110%
Up 95%
Up 400%
Up 550%
Up 20%
Up 100%
Negative working capital
Value stream organization
Focus on culture
Lean accounting
2003 2014
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© Solomon and Fullerton 2007. All rights
reserved. 5
What is Lean? Elimination of Waste Respect for People
Utilization of
Lean tool kit
in pursuit of
perfection in
safety,
quality,
delivery, &
cost!
Inspirational
leadership,
profound
cultural &
organizational
change
required!
Lean
Accounting
© Solomon and Fullerton 2007. All rights
reserved. 6
How is Lean Typically Implemented?
Elimination of Waste
Respect for People
Layoffs
Command &
Control
Silos & Local
Optimization
Middle Mgmt.
Struggling
Numbers a
mystery, don’t
know what
winning looks
like
Drive by
Kaizens
Focus on
Shop
Lack of
Alignment
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© Solomon and Fullerton 2007. All rights
reserved. 7
How Should Lean be Implemented?
Continuous Improvement
Respect for People
No layoffs
C-Level
Support
Value Stream
Org.
Lean Acctg.
Recognition,
empowerment,
coaching, &
training
Inspirational
Leadership
High Level VS
Mapping
Meaningful
Area
Narrow & Deep
Link all
Kaizens
Hoshin Kanri
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Are Your Financial Reports/Information Respectful To
All Customers?
• It’s all about RESPECT!
• Do the financial statements and reports
– Make the numbers easy to understand?
– Promote Lean behavior?
– Illustrate Lean benefits?
– Provide actionable information in a timely manner?
– Promote alignment between manufacturing and
accounting? © Solomon and Fullerton 2007. All rights reserved.
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Lean Accounting
Lean Accounting – The Accounting Department
• Use of Lean tools to eliminate waste/frustration in the
accounting department
Accounting for Lean – The Company Scorecard
• Plain English P & L, Box Scores & Value Stream Costing
• Actionable information that is understandable and
promotes Lean behavior
© Solomon 2016. All rights reserved.
© Solomon and Fullerton 2016. All rights reserved. 10
Caution !!!!
• Lean improvements initially invisible to
accounting
• The greater the initial success with Lean,
the more likely earnings will be
negatively impacted, and
• Accounting is often one of the biggest
roadblocks to a successful Lean
journey!
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© Solomon and Fullerton 2007. All rights
reserved.
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Lean is... • Not a cost reduction program or a manufacturing
tactic, it is a
• Cash flow generator,
• Customer service program,
• Capacity generator, and most of all, a
• People system
• Benefits of Lean based on how these improvements are utilized!
Strategy
© Solomon and Fullerton 2007. All rights reserved. 12
Lean is...
• Strategic
• A huge competitive advantage
• Benefits mostly invisible to accounting
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Setup Time Machine Run
Time Lot Size
Number of Different Part
Numbers Produced
2 Hours 6 Hours 512 1
1 Hour 6 Hours 256 2
30 Minutes 6 Hours 128 4
15 Minutes 6 Hours 64 8
7.5 Minutes 6 Hours 32 16
3.75 Minutes 6 Hours 16 32
113 Seconds 6 Hours 8 64
56 Seconds 6 Hours 4 128
28 Seconds 6 Hours 2 256
14 Seconds 6 Hours 1 512
L
E
A
N
L. Rubrich & M. Watson, Implementing World Class Manufacturing, (Ft. Wayne, IN, WCM Associates, 2000) p. 312.
Improvements Are Invisible
© Solomon and Fullerton 2007. All rights reserved. 14
Typical Plant Cost Structure
Direct Labor
60 – 70%
Overhead
10 – 20%
Material
20 - 30% Material
60%
Overhead
30% Direct Labor
10%
Decades Ago Today
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How Accurate Are Your Costs at the SKU Level?
Cost
Category
Weighting Accuracy Weighted
Accuracy
Material 60%
Direct Labor 10%
Overhead 30%
Totals 100%
© Solomon and Fullerton 2007. All rights reserved. 15
• What goes into the rates?
• How are the costs spread?
• How accurate are they?
Cost
Category
Weighting Accuracy Weighted
Accuracy
Material 60% 90% 54%
Direct Labor 10%
Overhead 30%
Totals 100%
Cost
Category
Weighting Accuracy Weighted
Accuracy
Material 60% 90% 54%
Direct Labor 10% 60% 6%
Overhead 30%
Totals 100%
Cost
Category
Weighting Accuracy Weighted
Accuracy
Material 60%
Direct Labor 10%
Overhead 30%
Totals 100%
© Solomon and Fullerton 2007. All rights reserved. 16
Traditional Cost Accounting
Drill
Mill
Direct Labor Rate/Hr. = $30
Overhead Multiplier = 3X DL
Material Cost per Unit = $10
Product Cost Metrics
Avg. Inventory 5,000
Lead time 8 Weeks
OTP 75%
Pack
Assemble 2 Minutes
4 Minutes 3 Minutes.
6 Minutes
Production Lot Size = 3,000 Pcs.
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© Solomon and Fullerton 2007. All rights reserved. 17
Kaizen Event
• U – shaped cell
• All equipment right sized & co-located
• Material kanbanned and lot size reduced
© Solomon and Fullerton 2007. All rights reserved.
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After Kaizen/Traditional Costing
Dots
(Drill holes on
manual machines)
Pins
(Mill slots)
Taping
(Assemble
components)
Pack Out (Inspect & pack)
4 Minutes 4 Minutes
6 Minutes 4 Minutes
Direct Labor Rate/Hr. =$30
Overhead Multiplier = 3X
Material Cost per Unit = $10
Product Cost Metrics
Avg. Inventory 500
Lead time 2 Weeks
OTP 95%
Production Lot Size = 300 Pcs.
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© Solomon and Fullerton 2007. All rights reserved. 19
What Really Happened Besides Co-locating Activities In a Cell, Right
Sizing Equipment, and Balancing the Process?
Metric Before After % Improvement
Inventory 5,000 500 90%
Lead Time 8 Weeks 2 Weeks 75%
On Time Performance 75% 95% 27%
Batch Size 3,000 300 90%
Sq. Footage 8,000 3,000 63%
Quality 50 PPM 15 PPM 70%
# of Transactions Many Few Dramatic
Throughput ? ? ?
Flexibility & Teamwork Poor Improved Dramatic
Unit Cost per Cost Acctg.
© Solomon and Fullerton 2007. All rights reserved. 20
What Really Happened Besides Co-locating Activities In a Cell, Right
Sizing Equipment, and Balancing the Process?
Metric Before After % Improvement
Inventory 5,000 500 90%
Lead Time 8 Weeks 2 Weeks 75%
On Time Performance 75% 95% 27%
Batch Size 3,000 300 90%
Sq. Footage 8,000 3,000 63%
Quality 50 PPM 15 PPM 70%
# of Transactions Many Few Dramatic
Throughput
Flexibility & Teamwork Poor Improved Dramatic
Unit Cost per Cost Acctg.
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Accounting for Lean
“Plain English” P & L’s
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Traditional Company
Profit & Loss Statement
$(000) %
Sales 1,303 100%
Cost of Sales @ Standard 787 60%
Purchase Price Variance 20 2%
Material Usage Variance 30 2%
Labor Rate Variance 10 1%
Labor Usage Variance 15 1%
Overhead Variance 50 4%
Total Cost of Sales 912 70%
Gross Margin 391 30%
Operating Expenses 250 19%
Operating Income 141 11%
© Solomon and Fullerton 2007. All rights reserved.
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Lean Company
“Plain English” Profit & Loss Statement
$(000) %
Sales 1,303 100%
Cost of Sales
Material 517 40%
Shop Supplies 67 5%
Shipping & Receiving Supplies 5 0%
Equipment Repairs 22 2%
Hardware 32 2%
Sub-Total Variable Cost of Sales 643 49%
Variable Margin 660 51%
Labor Costs 190 15%
Fixed Costs 42 3%
Cost (To)/From Inventory 37 3%
Sub-Total Fixed Costs 269 21%
Total Cost of Sales 912 70%
Gross Margin 391 30%
Operating Expenses 250 19%
Operating Income 141 11%
Conversion Costs
© Solomon and Fullerton 2007. All rights reserved.
© Solomon and Fullerton 2007. All rights
reserved.
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Lean Company
“Plain English” Profit & Loss Statement
$(000) %
Sales 1,303 100%
Cost of Sales
Material 600 46%
Shop Supplies 80 6%
Shipping & Receiving Supplies 8 1%
Equipment Repairs 25 2%
Hardware 35 3%
Sub-Total Variable Cost of Sales 748 57%
Variable Margin 555 43%
Labor Costs 222 17%
Fixed Costs 42 3%
Cost (To)/From Inventory (100) -8%
Sub-Total Fixed Costs 164 13%
Total Cost of Sales 912 70%
Gross Margin 391 30%
Operating Expenses 250 19%
Operating Income 141 11%
Conversion Costs
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© Solomon and Fullerton 2007. All rights reserved. 25
Financial Impact of
Inventory Reductions
During a Lean
Conversion
© Solomon and Fullerton 2007. All rights reserved. 26
Inventory Over Time at ANY Company
$ Inventory
Start Up Today
Overhead
Labor
Material
How much labor and overhead
resides on your Balance Sheet
today will determine the “hit” to
profit resulting from improved
inventory management/turns!
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© Solomon and Fullerton 2007. All rights reserved. 27
When Improving Inventory Turns it’s Payback
Time!
$ Inventory
Today Future
Overhead
Labor
Material
The reduction in labor and overhead
must flow through the P & L!
© Solomon and Fullerton 2007. All rights reserved. 28
Results from Improved Inventory Turns
2 4 6 8 10 12 14 16 18 20 22 24
Turns
Impact on
Income &
Cash Flow
$
$$
$$$
$$$$
Change in cash flo
w
Change in income
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Accounting for Lean
• Standard costing, labor reporting and variances
replaced with actual costs and performance
metrics
• Metrics maintained by employees at the work
cell and form basis for continuous improvement
• Metrics reinforce Lean activities and promote
continuous improvement
© Solomon and Fullerton 2007. All rights reserved.
Summary – Lean Inventory Valuation Methods
Method Labor, Conversion & Fixed Cost Detail
1. % of material Labor & conversion costs valued as a % of
material costs
2. Daily labor & conversion cost A daily expense rate is determined and
inventory = the daily rate X number of days of
material on hand
3. % completion For long assemblies, total costs are estimated
and inventory is based on % completion data
4. Cost per hour If tracking total hours, cost per hour is
capitalized
5. Turns Conversion & labor capitalized based on
material turns
30 Assumption – Material cost treated the same as in a standard cost system
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Lean Accounting Metrics
Area Quality Delivery Cost
Accounts Payable First Pass Yield Target Backlog % of Time on
Rework
% w/o Supplier
Invoice
Accounts
Receivable
First Pass Yield On Time Billing $’s Late Due to
Disputes
Payroll First Pass Yield On Time Performance Time Spent on
Corrections
Month End Close # of Journal Entries
# Correcting Error
# Correcting 2nd Time
On Time Perf. Overall
On Time Perf. By Item
Balanced Schedule
% Overtime
© Solomon and Fullerton 2007.
All rights reserved.
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Visuals Required and Posted, Value Stream Maps Created, Goals for
Each Item
© Solomon and Fullerton 2007. All rights reserved. 32
How Do We Make Lean Improvements Visible?
• As we physically change processes during the Lean
journey, manufacturing & accounting must work
together to transition to Lean Accounting.
– New financial statements – In “Plain English”
• No standard costs, absorption or variances
• Easy for everyone to understand - RESPECTFUL
– Box scores
• Illustrate improvements in Lean operating metrics and capacity
– Value stream costing
– Focus on cash flow
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Summary - Why Companies Need an Alliance Between
Manufacturing & Accounting
• To create a scorecard that is both supportive of the Lean journey and is understood and owned by all associates
• To have accounting and manufacturing jointly anticipate financial impact of Lean initiatives - no surprises
•
• To highlight and understand the full value of Lean improvements
• To be one team and respect each other!
© Solomon & Fullerton 07. All Rights Reserved
For Further Information……
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Available at www.wcmfg.com
or Amazon.com
Email:[email protected]
Cell: 410-207-3340
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Questions
© Solomon & Fullerton 07. All Rights Reserved